A Case Study in Compliance vs. Ethics.

* As a compliance and ethics consultant, I am often asked to clarify the difference. Usually, compliance is "black and white" --you're either in compliance or you're not--whereas ethics is rife with "gray areas."

With compliance, the boundary is defined by a law, rule, regulation or policy and adherence is mandatory. Ethics, though, involves judgment and making choices about conduct that reflect values: right and wrong or good and bad. Words like "integrity," "transparency" and "honorable behavior" crop up. The usual catchphrase is that ethics is about "doing the right thing."

Is it possible to be ethical, but not compliant? Certainly. Imagine breaking a rule in order to save someone's life; jumping on the subway tracks to pull a fallen child out of a train's path, for example.

And what about the converse: being compliant, but unethical? In the defense contracting arena, there is a very interesting drama currently unfolding that amounts to a case study in corporate compliance versus ethical business conduct.

TransDigm Group Inc. sells parts for military and commercial aircraft. It has grown over 25 years largely through acquiring companies that design, manufacture and sell--usually as sole-source provider--specialized and proprietary products. Since almost every aircraft flying today contains parts produced under the TransDigm umbrella, the business can count on long-term recurring aftermarket--in other words, spare parts--sales. It's a very successful business. In 2018, its sales totaled $3.8 billion, of which defense accounted for approximately 35 percent. Their 2018 annual report states its goal is to give shareholders "private equity-like" returns and, in fact, according to The Motley Fool, its shares have appreciated by more than 1,200 percent over the past 10 years.

The company has been in the news lately, because the Defense Department's office of the inspector general issued a report in February on its investigation into TransDigm's pricing practices. The inquiry requested by members of Congress concerned potential fraud, waste and abuse of taxpayer dollars. The OIG studied a sample of 47 parts and concluded TransDigm realized excess profit--using an OIG-determined benchmark of 15 percent profit as "reasonable"--on 46 of them. Many of the parts examined had realized excess profit percentages greater than 500 percent and some went up to as much as 4,400 percent. The sensational examples in the report included a nonvehicular clutch...